Will Xi Jinping's Strongman Rule Leave China Weaker After The

the new normal in asia A National Bureau of Asian Research series exploring ways in which the Covid-19 pandemic might shape or reorder the world across multiple dimensions Will Xi Jinping’s Strongman Rule Leave China Weaker after the Pandemic? William C. McCahill Jr. July 18, 2020 Some pandemics have changed the direction of history. Others have shifted history’s gears. In the fourteenth century, bubonic plague decisively turned European history by reordering established economic, political, and religious power, even if the new order took decades, if not centuries, to fully manifest itself. In China’s recent history, the Manchurian plague of 1910 gave a final nudge to the already debilitated Qing Dynasty, pushing it toward collapse the following year. The Covid-19 pandemic will not immediately bring the demise of the current Chinese Communist Party (CCP) regime. Indeed, in the near term it may well help tighten the regime’s authoritarian grip on the Chinese people. The party-state under General Secretary Xi Jinping continues to reverse the “reform and opening” policies that have brought China the 40 most prosperous years of its modern history. By shifting successful policies into reverse, Xi has weakened his regime on at least four counts: governance, economic growth, social cohesion, and international reputation. Although Xi’s strongman rule seems secure for the moment, the pandemic has accelerated all four trends. As the pressure on him grows, Xi and his lieges may be tempted to take rash action to preserve their power. William C. McCahill Jr. is a senior resident fellow at the National Bureau of Asia Research (NBR). Before joining NBR, he had worked in Hong Kong and China as the senior adviser for China at Mirabaud & Cie. and earlier in a similar capacity for Religare Capital Markets. A 25-year Foreign Service career preceded his business activities, including posts in Hong Kong, Taiwan, and Beijing. The New Normal in Asia Governance in the central bureaucracy and its line ministries, authority has become increasingly concentrated in From the outset of his term in 2012, Xi Jinping “the leadership core”: decisions must wait on Xi or has pulled decision-making away from government his intimate courtiers. agencies and institutions, beginning with the State Council. Premier Li Keqiang, the nominal head of Thus, when the coronavirus outbreak first government, has been marginalized, and Xi has erupted in Wuhan in early January, the authorities instead arrogated power to party organs that he in Beijing tarried a full fortnight before they controls and to himself personally. imposed draconian quarantines on Wuhan, Hubei Province, and then much of China. The delay cost Even as Xi was consolidating power by remolding countless Chinese (and foreign) lives, sank China’s China’s governing institutions around himself, and the world’s economy, and showed the frailty he began wielding a far sharper tool: the scythe of a decision-making process that turns on a single of an “anticorruption” campaign. The campaign person. Had China’s vaunted alarm systems installed gradually turned its sights from pursuing financial after the 2003 SARS epidemic actually worked, this irregularities and moral turpitude to policing year’s pandemic might have been contained in its ideological orthodoxy and, above all, cadres’ loyalty first phase. to Xi. This shift of emphasis made clear that the campaign was in its essence a political purge. It settled scores with those who would have impeded Economic Growth Xi’s ascension to the party throne, eliminated potential rivals, and broke up party factions Xi Jinping has turned back the clock on Deng inimical to Xi’s interests. The anticorruption Xiaoping’s attempts to revitalize the Chinese agencies have become permanent fixtures in the economy by opening it to foreign trade and party-state bureaucracy. investment and by encouraging private enterprise. On the theory that bigger must be better, Xi’s reshaping of the party-state institutions and state-owned enterprises (SOEs) in steelmaking, his anticorruption campaigns have had, as one shipping, shipbuilding, and other heavy industrial might expect, an intimidatory effect on the CCP sectors have been recombined and then swallowed rank and file as well as government employees. Xi’s smaller state companies. When Zhu Rongji left the governance style has slowed decision-making at post of premier in 2003, he foresaw the number all levels of the bureaucracy and stifled what little of central government-owned SOEs shrinking initiative cadres might once have had to suggest in five years from around 180 firms to around policy solutions to policy problems. Meanwhile, 15, all operating in national security areas like Of all their concerns for the post-pandemic economy, CCP leaders worry most about employment. 2 The New Normal in Asia telecoms and energy. Today, there are still around of the economy; and local governments depend on 100 “central SOEs,” the total having been reduced land leases to fund their own operations. But the chiefly through reconsolidation. There seems little major property developers themselves have heavy economic sense in this retrogression: SOEs employ debts, including U.S. dollar–denominated debt to millions of people, but they account for no more foreign banks. Debt levels in the economy continue than a quarter of national output and suck up 80% to rise and could constrain future government of bank credit. Many would be bankrupt by any Big spending. Foreign observers estimate overall debt Four accounting definition. In drawing an outsized at about 310% of GDP, although some independent quotient of bank loans, SOEs crowd out nimble, Chinese economists, trying to account for disguised job-creating private firms. SOE and state bank nonperforming loans, put the figure much higher. Xi’s industrial policies, however, may be less about economics and more about politics—CCP While last year’s alarms about local and politics, that is. For even as he builds a Jurassic Park provincial government debt have gone silent, the of SOE dinosaurs, Xi has been explicitly tightening People’s Bank and Finance Ministry continue to party control of both state- and private-sector voice concern about indiscriminate bank lending. companies. In the state sector, including SOEs listed There also appears to be jitters over the value of in Hong Kong, company articles of incorporation China’s foreign exchange reserves, as those might have been revised to show the companies’ party need to be deployed (despite inflation risks) to secretaries as the chief decision-makers. These cushion against further shocks from the world companies’ executive ranks have been shuffled so economy. Even as it aims to repatriate foreign that Xi loyalists have taken the top jobs. C-suites assets, the central bank has been tightening mean Communist Party suites. In the private sector, controls on foreign-exchange outflows. As one analogous, though less overt, changes have occurred, sign of this new stringency, across the Yangtze with party committees now widely installed in both Delta teachers, retirees, and others accustomed Chinese and foreign firms. to foreign travel have been forced to turn in their passports to their work units’ party secretaries. With state banks disbursing 80% of their loans to state companies, and the private sector still starved Of all their concerns for the post-pandemic for credit, it is no surprise that Beijing’s fiscal and economy, CCP leaders worry most about monetary stimuli for offsetting the Covid-19 blow to employment. Rightly so, for keeping people at work the economy should rely heavily on the state sector. and earning an income determines both economic Previous efforts to reduce SOE and local government growth and social stability. Official statistics claim debt have been abandoned. New central government that first-quarter GDP contracted 6.8%, a risibly low funding mandates yet more infrastructure figure for an economy in which hundreds of millions development. To the traditional “rails, roads, and simply went home and stayed there. Lockdowns and rebars” projects have been added higher-tech local quarantines effectively halted most movement modules like 5G buildout and a nationwide electric of people and goods through the economy. So it is vehicle–charging network. small wonder that an estimated 80 to 100 million people remain out of work, perhaps more if one Criteria for bank lending have been loosened, tallies migrant workers who reported to factories nominally to aid the private sector, although only to be laid off when the factories closed again for anecdotal evidence suggests that smaller firms have lack of orders. yet to benefit. Property developers have been helped, of course, as real estate remains the strongest driver 3 The New Normal in Asia Further darkening China’s economic outlook are episodes of “struggle.” Amplifying the effects of the demographic clouds of a fast-aging population mass mobilization against the pandemic has been and a shrinking workforce. China has in fact become the surveillance panopticon installed across Xi’s old before it became rich. Xi had planned to celebrate China. Tested first against the Muslim Uighurs in 2020 as the year when China fulfilled the party’s Xinjiang, the techniques—and ubiquitous CCTV promise of giving Chinese citizens “a moderately cameras, facial recognition technology, artificial well-off society,” but the pandemic has only created intelligence, and QR codes—have allowed police new challenges for achieving this goal. and other authorities to track citizens’ behavior and movements as never before. The technologies enable the regime to learn a great deal about its subjects. Social Cohesion Moreover, the regime’s controls on information The Covid-19 pandemic has also exposed the allowed the coronavirus to spread rapidly through fissures in Chinese society between rich and poor, Wuhan, in surrounding areas, and, soon enough, urban and rural, and coastal and interior provinces.

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